Macroeconomic Instruments

Question 1

How can fiscal policy influence the current account?

Answer 1

By reducing AD we can reduce income and as a result we will reduce the MPI (Marginal Propensity to Import)

Could make our goods more valiabke (by increased investment) leading to us importing less

Question 2

How can we use fiscal policy to meet our environmental goals?

Answer 2

Green taxes

Question 3

When interest rates are raised what is the following process called?

Answer 3

Expansionary monetary policy transmission mechanism

Question 4

Explain the expansionary monetary policy transmission mechanisms in short terms?

Answer 4

Cut interest rates leads to:
Lower credit card, saving, mortgage, currency exchange rates
Leading to higher consumption
Lower business interest rates leading to higher investment

Question 5

What is a beautiful point to always bring in?

Answer 5

Depending on how extra revenue is spent LRAS could shift

Question 6

Why do exchange rates decrease with interest rates are cuts?

Answer 6

This is because there will be less of an intensive to save so hot money will leave the country which will a withdrawal from the circulare flow of income which will increase the supply of the currency and therefore depreciate the exchange rate

Question 7

Explain the expansionary monetary policy transmission mechanism in full

Answer 7

A cut in the central bank interest rate occurs
• Firms lower the interest rates on their credit cards leading to higher consumption
• There will be lower saving rates in the economy so consumption increases
• Mortgages rates will decrease leading to more disposable income and therefore consumption
• Rates on business loans will decrease leading to higher investment
• Weaker exchange rates will occur leading to an increase net exports

Question 8

What is a fundamental disadvantage of monetary policy?

Answer 8

It doesn’t effect anything in the international market.

For example, if there is high demand pull inflation due to increases in the prices of commodities (mainly oil), raising interest rates will do nothing

Question 9

What are the 3 main ways to shift LRAS?

Answer 9

Quality
Quantity
Productive efficiency

Question 10

What are the 3 main clear objectives that help with remembering free market S-SPs?

Answer 10

• Tax Reform
• Labour Market Reform
• Competition Policy